The View from No 50





May 2004

K P Bonney & Co 

Chartered Accountants and

Chartered Tax Advisers

50 Cleasby Road  Menston 

Ilkley LS29 6JA

Tel: 01943 870933 

Fax:  01943 870925 








In the month of May we find ourselves in the middle of the P11D reporting season.  This is therefore a good time to review the provision of telephones.  A change of ownership arrangements could bring welcome tax and national insurance savings.


                                   NIC         NIC      Income

                                 Class I   Class IA     tax

Reporting and

payment procedure    P11       P11D      P11D


Rate of NI / tax

Employer                  12.8%    12.8%         -

Employee                11%/1%       -      22%/40%         


Home phone - employer is subscriber

Costs paid by employer

Line rental                   No         No*        No*

Business calls              No          No          No

Private calls                 No         No*        No*


Home phone - employee is subscriber

Costs paid by employer

Line rental                  Yes          No         Yes

Business calls             No#         No        Yes~

Private calls                Yes          No         Yes


Mobile phone - employer is subscriber

Costs paid by employer

Costs                           No          No          No


Mobile phone - employee is subscriber

Costs paid by employer

Private calls                Yes          No         Yes

Other costs                  No          No        Yes~


Yes denotes liability.


No denotes no liability.


*  Provided the employer’s sole purpose in providing the facility is to enable the employee to perform his or her duties and any actual private use is not significant.


~ But the employee can claim a deduction for business use in his / her tax return.


# Provided the cost is supported by evidence.  Without evidence, NI is chargeable.


Our advice:  Employer provision is generally more tax and NI efficient than employee provision.  Make enquiries with your telecoms supplier to find out whether there are any non tax factors which you should take into account when making your decision about who should contract for these services.





This article is about one of the most efficient yet least well known and least used ways of avoiding inheritance tax.


Inheritance tax is a tax on capital given away either on death or within seven years of death.  It is fairly easy to recognise when capital is given away.  Gifts of land, shares and cash are common examples.


Most people are aware that there are a limited number of exemptions which can be set against gifts of capital.  The annual exemption is the exemption which generates the most questions.  It is relatively easy to understand and this encourages people to use it with confidence.


Potentially the most wealth preserving exemption is the exemption which goes under the name of “Normal expenditure out of income”.


The attractive features of the exemption are:


·          There is no fixed upper limit to the amount of money which can be given away with the benefit of the exemption.


·          Its availability is not dependent on the donor surviving for a period of seven years after the date of the gift.


So what conditions must be met in order to take advantage of this exemption? 


The are three conditions.  These are that the money which is the subject of the gift:

(1)     is given as part of the transferor’s normal expenditure,

(2)     is made out of the transferor’s income, taking one year with another and

(3)     after allowing for all gifts forming part of his or her normal expenditure, the transferor is left with sufficient income to maintain his or her usual standard of living.


Many people find it difficult to understand what these conditions mean.  This, coupled with poor or non existent record keeping on the part of the deceased donor, accounts for the low take up of claims for exemption.


But those donors who organise themselves properly can preserve thousands of pounds of wealth for their families.


How do you demonstrate that a gift is part of your normal expenditure? 


You (or rather your executors) have to show that the gifts you made formed part of a settled pattern established by you during your lifetime.  The test is qualitative rather than quantitative as illustrated by the decision in the case of Bennett v Inland Revenue Commissioners.  Mrs Bennett was the beneficiary of a trust from which she was entitled to a substantial income.  She lived modestly, however.  As she did not need the trust income she instructed the trustees to pay the income directly to her three sons instead. The trustees made payments to her sons but Mrs Bennett died unexpectedly at a time when the trustees had made only two payments.  Was this enough to bring the gifts within the exemption? Had a settled pattern been established? The Inland Revenue argued that the payments to the sons were gifts of capital which, being made within seven years of the date of Mrs Bennett’s death, were chargeable to inheritance tax.  The sons argued that the gifts were exempt as they were made as part of her normal expenditure.  The court held in favour of the sons.  The gifts were part of a settled pattern established by Mrs Bennett.  A settled pattern can be established either (i) by reference to a sequence of payments by the transferor out of past expenditure or (ii) by proof of a prior commitment or resolution adopted by the transferor regarding his or her future expenditure.  In the case of Mrs Bennett she had made a considered determination to give her surplus income from the trust to her sons and she had implemented her determination by requesting the trustees to pay the trust income to her sons.  Even if the trustees had made only one payment, that gift would have benefited from the exemption because the key here was not the frequency or number of payments made but the fact that the payments were made as part of the donor’s prior commitment.



The second of the three conditions is a simple arithmetic exercise.  It does not matter if there is the odd year in which expenditure exceeds income.  What it is important to demonstrate is that the gifts for which the exemption is claimed are financed out of available income, taking one year with another.


The second condition almost requires gifts to be made as gifts of cash.  Gifts of other assets are not ruled out but, unless the asset in question (perhaps a car or a horse or a painting) is bought at the request of the donee and immediately given to him or her, it will be difficult to argue that the gift is made out of income.


As regards the third condition it is the standard of living of the donor at the time of the making of the commitment which is key.  If the donor can afford the gifts at the time of the making of the commitment but later suffers unforeseen financial adversity (such as unemployment or private care costs) the fact that the donor then suffers a reduction in his or her standard of living does not jeopardise the claim for the exemption.


Our advice:  The normal expenditure out of income exemption is under-utilised because donors and their families fail to maintain records of the donor’s income and expenditure and records of prior commitments.  After the death of the donor it is very difficult for the remaining family members to find and extract the key financial information needed to support a claim for the exemption.


Make things easier for your executors and beneficiaries by making a written record of your annual income and expenditure and any settled pattern of gifts to which you have committed.  Give updated copies of these records to your executors every year.


With a view to helping families wishing to claim the exemption, the Inland Revenue has recently prepared a template of the information it expects to receive as part of the claim.  If you would like a copy of the template please get in touch.


The amounts of inheritance tax which can be saved through using this exemption are potentially very large indeed.




A United fan walked into a bar, leading an alligator by a leash.  He asked the bartender, “Do you serve City fans here?”

“We certainly do,” said the bartender.

“Good,” replied the fan.  “Give me a beer and I’ll have a City fan for my ‘gator.”



Copyright  Ó  K P Bonney & Co LLP 2004.  All rights reserved. No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers.  Disclaimer  The publishers have taken all due care in the preparation of this publication. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors  or the publishers.

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